Clients snapping up enhanced indexing strategies

Enhanced domestic indexed equity experienced dramatic growth in 2003, while more traditional passive indexed equity grew on pace with the recovering market, according to Pensions & Investments' latest money managers survey.

The top 10 managers of enhanced domestic indexed equity, based on their U.S. institutional tax-exempt assets, managed $214.8 billion as of Dec. 31, a dramatic 75% upswing from the $122.7 billion at the end of 2002, as reported in last year's survey.

Much of that upswing is due to TIAA-CREF, New York, whose reported $62 billion in enhanced domestic indexed equities, as of Dec. 31, moved them to second in the asset class. TIAA-CREF reported zero in the asset class at the end of 2002 and $65.3 billion in enhanced domestic indexed equity at the end of 2001.

The lack of enhanced domestic indexed assets for TIAA-CREF in last year's survey was due to quantitatively managed assets shifting between enhanced indexing and traditional indexing, said Scott Budde, managing director in the investment management division of TIAA-CREF.

"The bulk of our equity assets under management are in one single account, right around $100 billion in assets under management. That account, unlike many of the funds, has all kind of segments. Some of those segments are quantitatively managed," Mr. Budde explained. In the future, these quantitatively managed accounts will be reported as enhanced indexing, he said.

Wellington Management Co. LP, Boston, reported $5.9 billion in enhanced domestic indexed equities as of Dec. 31, after reporting no enhanced strategies for 2002. For the previous year's survey, Wellington included its enhanced domestic equity as part of its active domestic assets, according to a spokeswoman. Wellington managed $4.8 billion in enhanced domestic indexed equities at the end of 2002.

The largest manager of enhanced domestic indexed equities experienced dramatic growth as well.

Barclays Global Investors, San Francisco, reported $569.7 billion in internally managed U.S. institutional tax-exempt assets as of Dec. 31. Of that total, BGI managed $64.4 billion in enhanced domestic indexed equities, an increase of 36.3% over the $47.3 billion reported at the end of 2002. The percentage of BGI's internally managed U.S. institutional tax-exempt assets in enhanced domestic equities dipped slightly, however, to 11.3%, as of Dec. 31, from 11.6% for the previous year.

BGI's dramatic increase in internally managed enhanced assets was due to a combination of new accounts and existing clients shifting their strategies from passive (Pensions & Investments, March 22).

State Street Global Investors, Boston, reported $12.1 billion in enhanced domestic indexed equities, more than doubling their total of $6 billion at the end of 2002. Enhanced domestic indexed equities account for 1.7% of the firm's internal U.S. institutional tax-exempt indexed assets, up from 1.2% at the end of 2002.

Most of SSgA's indexing strategies still lie in the traditional passive arena, with $207.5 billion reported in passive domestic equities, about 28.8% of the firm's total internally managed U.S. institutional tax-exempt assets, down from 33.5% at the end of 2002.

The top 10 managers of passive domestic equities managed a combined $827.9 billion of their total internally managed U.S. institutional tax-exempt assets, a market-adjusted 2.2% hike from last year's top 10 total of $617.8 billion.

Northern Trust Global Investments, Chicago, saw the most dramatic increase from last year's survey: Its passive domestic equity assets rose to $102.9 billion as of Dec. 31, a 157.9% increase from $39.9 billion at the end of 2002. The growth was largely due to approximately 170 new clients from the firm's February 2003 acquisition of the passive and enhanced indexed business of Deutsche Asset Management, New York (P&I, Sept.15, 2003). Deutsche Asset Management had reported $38.1 billion in passive domestic equity assets at the end of 2002.

Northern Trust also saw its passive international equity and bond assets rise to a total of $24.8 billion as of Dec. 31, from $1.1 billion at the end of 2002. Deutsche's passive international securities totaled $10.2 billion at the end of 2002.

On the fixed-income side, Ryan Labs, New York, supplanted SSgA as the largest manager of enhanced domestic indexed bonds, managing $17.4 billion in the asset class as of Dec. 31, up 16% from $15.0 billion at the end of 2002.

Overall enhanced indexed bonds among the top 10 rose to $83.5 billion as of Dec. 31, up 10.2% from $75.7 billion at the end of 2002.

Traditional passive domestic indexed bonds saw a more significant increase.

The top 10 managers of passive domestic indexed bonds managed $191.9 billion in assets as of Dec. 31, up 27% from the total of $151.1 billion at the end of 2002. The top 10 managers saw the asset class increase a market-adjusted 22%.